“The company considered India as a vast estate, the profits of which were to be withdrawn from India and deposited in Europe.”
-Romesh Dutt in “The Corporation that Changed the World”
Grasping the size and influence of the British East India Company is a sanity-checking exercise in this age of consolidation and global platform scaling.
I recently cracked open “The Corporation that Changed the World.” The East India Company existed in different forms for ~270 years.
Anchored to a 1990 currency base rate ($), the OECD estimates that between 1600 and 1870, each geographical territory’s share of global GDP shifted as follows:
- Western Europe: 20.0% to 33.6%
- China & India: 51.7% to 29.5%
- Britain: 1.8% to 9.1%
“Like the modern corporation, the company’s share price was its heartbeat”… “[it] was a corporate colossus, alone accounting for 13-15% of all Britain’s imports between 1. Every seventh pound of goods brought into Britain would be carried on company ships, unloaded at company docks and sold in company auctions…”
Back to the Global Macro Grind…
In a different context, pulling back the curtain on observable money flows reveals a comp tailwind of sorts with regard to money flowing back to developed and emerging market equities. These trends tend to be sticky with rearview narratives.
Inflation’s peak in Q1 and ongoing deceleration has been a strong force for dollar weakness and tightening sovereign spreads YTD. The compressing trend in the 10Yr Treasury-Bund spread hasn’t wavered, peaking at +233bps right before the start of the year. This spread has since compressed by 53bps in a straight-line by financial market standards. The tightening in spreads in European corporates with a move higher in European sovereigns has also been a newsy “flows” topic next to the ongoing move in the EUR/USD.
Our #EuropeSlowing theme centers on the fact that European growth decelerated Y/Y for 6 consecutive quarters from Q1 of 2012 through Q2 of 2013. That comp tailwind set the stage for ~1.7-2.2% Y/Y growth for 2 ½ years to this point, making the two-year base effect an increasingly “tough” comp from here to put it simply.
Our financials team picks apart the Investment Company Institute’s flow of funds survey on a weekly basis. The mutual fund flow data is collected weekly from ICI and represents a survey of 95% of the investment management industry's mutual fund assets. The team importantly points out that “mutual fund data largely reflects the actions of retail investors.”
In our Chart of the Day we focus exclusively on the net flow of funds in developed market international equity mutual funds. Both developed and emerging market mutual funds have experienced steady positive flows this year.
In the U.S., the equity mutual fund outflows are structural in nature, but based on the data, the “passive” story is harder to craft for international equity flows. Picking apart the 3-year flow to developed market equity mutual funds ($MM):
- 2015: $97,629
- 2016: -$20,318
- 2017 YTD: $42,856
There is a clear momentum in developed market equity mutual fund flows, which we believe has everything to do with past performance and the economic recovery in Europe.
In every month this year except March, developed market mutual fund flows have been positive. Aside from the rearview recovery in the Eurozone economy, since the beginning of 2015 the DAX is sitting on +730 bps of outperformance vs. the S&P 500, and net cumulative developed market mutual fund flows over this period totals $120Bn (this “developed” bucket does not isolate Europe specifically which is a key consideration).
From here the big question centers on the incremental force of flows across equities, and more impactful the Euro currency, fixed income.
Major indices like the CAC 40 and DAX hit their YTD highs in May and June respectively and developed market equity mutual funds had their largest positive inflow in July (+$11.2Bn) since August of 2015 (+$11.4Bn). What may be rearview flow-chasing (or still catching up which is a debate) will meet what we view as a probable slowdown in economic growth for the next two quarters (QUAD 4)…
In addition to our core GIP modeling process, structural long-term demographic challenges, and market-based factors to pinpoint consensus positioning facing the Eurozone economy, flow of funds data is just another indication of the psychological momentum in “Europe is good”.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.16-2.27% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6158-6422 (bullish)
VIX 9.56-16.03 (bearish)
EUR/USD 1.16-1.18 (neutral)
Oil (WTI) 46.18-49.78 (bearish)
Gold 1 (bullish)
Good Luck Out There,
Ben Ryan
